Pay Now or Pay Later? Roth vs. Traditional?

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As financial consumers, we face many choices on how to invest our hard-earned money for retirement. While traditional and Roth IRAs are fairly well-known investment tools, their differences may seems a little confusing to some. We’re here to help.

Let’s break it down in simplest terms and if you want to dig a little deeper, click here.

The main distinction between a traditional and a Roth IRAs is how and when you pay taxes on your plan contributions.

With a Roth IRA, you pay taxes when you put your money into your account. The contributions and earnings including capital gains, dividends and interest income, etc, are considered after-tax money, so when you withdraw the money years from now, you won't have to pay income tax on it. If you think you may be in a higher tax bracket when you’re ready to withdraw some funds, a Roth may be appropriate. Also, there’s no telling what tax rates might be years from now, so with a Roth you won’t have to worry about it.

With a traditional IRA, the money you put into your plan is tax deductible in the year you make your contribution. You only pay taxes when you withdraw the money during retirement at your then-applicable tax rate. So, if you think you’ll be in a lower tax bracket when you retire, a traditional IRA may be best for you. All the funds, both your contributions and earnings, are treated as pre-tax in a traditional IRA.

A few more differences for you to ponder— traditional IRAs require you to start taking minimum distributions (RMDs)—mandatory, taxable withdrawals of a certain percentage of your funds—at age 70½, whether you need the money then or not. Roth IRAs, on the other hand, have no such withdrawal requirements during your lifetime.

Income limits for 2019 will vary as well. For a traditional IRA, anyone with an earned income can open one. For a Roth, you’re subject to an income limit of an adjusted gross income of $137,000 or less for single filers and $203,000 or less for married couples filing jointly.

Anything the same you ask? Yep, 2019 contribution limits are the same for both IRAs-- $6,000 or $7,000 if you’re age 50 or older.

Of course, it’s up to you to decide which plan works best for your retirement goals but know that regardless of whether you open a traditional or Roth, you’ll pay no taxes at all on the growth of what you’ve contributed. Either way, both types of accounts are great vehicles for you to sock away money for your retirement years!

For more detailed information about the benefits and differences of both Roth and traditional IRAs go to https://bit.ly/2Cgw1xR